Strengthen the Wording in the Responsible Party Statute

A corporate officer or director who has control or supervision of or is charged with the responsibility for filing returns or paying taxes should be personally liable for taxes owed by the corporation.


Background
Under Texas Tax Code Section 111.016, a person who collects taxes must pay this money to the state along with any penalties or interest on the amount collected. The person or corporation cannot use any taxes collected for any other purpose.

Currently, a corporate officer s position of authority does not make that officer the person responsible for the corporation complying with tax laws. To hold an officer or director of a corporation that collected taxes liable for these taxes, the state mus t prove that the officer or director was actively and directly responsible for using the taxes for another purpose and must identify the amount of money involved.

Several recent court cases suggest that the law needs to be strengthened to be effective. Unless the officer or director admits to wrongdoing, the state has a heavy burden of proof in designating who is the person responsible for the taxes.

The first case Dixon v. State involved a gasoline and diesel fuel tax liability accrued by a company in 1991. 1 The state based its case on two main points. First, Section 111.016 of the Tax Code created a trust relationship between the corporation and the state such that the corporation president was liable for the payment of taxes collected. Second, the state alleged that the president participated in fraudulent behavior by converting taxes for other uses. In this case, the president acknowledged that he had authorized the payment of taxes to other entities. The court ruled against the president based primarily on his own admission of wrongdoing. The question of whether he was a person under Section 111.016 of the Tax Code and could be held personally liable was not identified as a basis for the court ruling.

The case of N.S. SportsWear, Inc. and Norman Stalarow v. State addressed the same issue. 2 The state used the same two arguments as in the Dixon case. In this case the executive did not admit any wrongdoing. The executive contested the amounts alleged to be due and denied that taxes had been converted to other purposes. The Texas Court of Appeals at Austin reversed a lower court ruling against the executive, reasoning that the State must prove the actual amount he received or collected.

A third case dealing with the same issue, W. E. Burgess v. State, is currently before the Austin, Texas, Court of Appeals. 3 The facts are similar to those in the Dixon case. Therefore, the court may decide this particular case without defining the person responsible for taxes under Section 111.016.

These recent court cases point to a weakness in the law that could lead to more challenges, which could involve large amounts of taxes legitimately due to the state.

The federal government and other states have statutory language that effectively addresses the issue. The Internal Revenue Service defines person as an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to (collect or remit a tax). . . . 4 This language is effective in promoting more effective collection action.

Many states have adopted similar legislation. The Ohio statute holds any employees having control or supervision of or charged with the responsibility of filing returns, or officers or trustees responsible for the execution of the corporation s or business trust s fiscal responsibilities personally liable for the failure (to remit taxes collected). 5 Oklahoma uses the standards in the Internal Revenue Code to hold an officer or director liable for sales taxes, income taxes and motor fuels taxes.

The following illustrates the advantage of a stricter definition of personal liability. Best Products Company of New York filed for bankruptcy on January 5, 1991. The Texas Comptroller filed a p roof of claim in January 1991 for December 1990 sales taxes in the amount of $2.3 million. 6

The company owed sales taxes in other states as well. Because Ohio held the corporate officers personally liable for the company s sales tax, Best filed a motion in bankruptcy court to pay Ohio approximately $2 million in sales tax. It did not make such a motion to pay its Texas sales tax obligation. Texas is receiving its $2.3 million over time without interest under the bankruptcy court s ruling.


Recommendation
The Legislature should amend Section 111.016 of the Texas Tax Code to specifically define person as any officer or director of a corporation who has control, supervision, or responsibility for filing returns or paying taxes collected by the corporation and owed to the state.

Officers and directors of corporations should be held liable for taxes that are collected but not remitted, and such liability should not be discharged in the event of bankruptcy.


Implications
This change would allow the state to collect existing tax money in tax collection efforts against delinquent taxpayers and would largely not affect most taxpayers. With the new language, the state would have an easier time collecting its taxes in contested cases. The threat of personal liabi lity for corporate officers would be an incentive for the corporation to pay its tax obligations before a case got to court. The federal government and many other states have used similar statutory language effectively.

This clarification of current policy would not affect most taxpayers. It would impact only those who wrongfully withhold taxes. They could no longer challenge a tax liability based on the argument that they did not personally divert taxes to other uses.


Fiscal Impact
Many cases in which the state currently does not collect tax revenue would be settled in favor of the state or would be settled without having to file a claim. The following estimated revenue gain is based on the number of recent cases and the amount of ta x money involved. Actual gains could fluctuate from year to year due to the timing of court cases.

Fiscal Revenue Gain to the Gain to the Total Gain Change in
Year General Revenue Fund State Highway Fund 006 to the State FTEs

1994 $4,300,000 $1,000,000 $5,300,000 0
1995 4,300,000 1,000,000 5,300,000 0
1996 4,300,000 1,000,000 5,300,000 0
1997 4,300,000 1,000,000 5,300,000 0
1998 4,300,000 1,000,000 5,300,000 0



Endnotes
1 Dixon v. State, 808 S.W. 2d 721 (Texas Court of Appeals Austin, 1991).
2 N. S. SportsWear, Inc. and Norman Stalarow v. State, No. 3-90-225-CV (Texas Court of Appeals Austin, 1991).
3 W. E. Burgess v. State, No. 3-90-174-CV, growing out of a summary judgment granted at the trial court level on May 24, 1990.
4 26 U.S.C. Section 6671b.
5 Ohio Rev. Code Ann. Section 5739.33.
6 State of Texas v. Best Products Co., Inc., Adversary Proceeding No. 91-6094A (U. S. Bankruptcy Court of Southern New York).